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Methods e x p l a i n e d
Methods explained is a quarterly series of short articles explaining statistical issues and methodologies relevant to ONS and other data in a
simple, non-technical way. As well as defining the topic areas, the notes explain when, why and how these methodologies are used. Where
relevant, the reader is also pointed to further sources of information.
Index numbers
Peter Goodridge
Office for National Statistics
SUMMARY
X(t)
(X )I
(t1)
(1)
(t1)
or, for the year 2003, the index is equal to (37/34)*113.33 = 123.33.
The informed reader will notice that the above index has been
chained. The difference between chained and non-chained indices is
discussed below.
Table 1
Simple example
Time (t)
2000
2001
2002
2003
2004
2005
2006
54
Laspeyres
One of the most common forms of indices used at the ONS is the
Laspeyres. The main feature of the Laspeyres is that the weights
used are taken from the base period. For example, if we consider
a price index with a base t-1, then the prices will be aggregated for
all periods using weights from that period. However, if the index is
chain-linked, then the weight will be taken from the previous period.
Chain-linking simply means updating the weights so that, for each
period, the base used is the weight from the previous period. ONS
output (GDP or GVA) measures are now calculated as chain-linked
Laspeyres indices and are referred to as chained volume measures
(CVM). For a fuller discussion of chain-linking in relation to
National Accounts output measures, see Robjohns (2006).
Below are two simple examples of a weighted price index consisting
of two goods, X and Y. The weights used are the quantities of the
goods consumed and so represent their relative importance. The
price is multiplied by the quantity, to obtain expenditure, and the
change is expressed as a percentage of the expenditure in the base
period. Equation 2 below shows a standard Laspeyres price index;
however, the principle is true for any type of index, not just prices,
that is the weight is taken from the base period. For instance, for
a quantity index, the quantity in the numerator term would be
updated rather than the price, and the denominator would remain
the same.
L
t, 0
Index (I)
30
33
34
37
35
36
40
100
110
113
123
117
120
133
P .Q
P .Q
i
i,t
i,0
i, 0
i, 0
100
(2)
Methods explained
Table 2
Example of a weighted Laspeyres index
Expenditure
Expenditure: in base period:
P0*Q0
Time (t) P(X)
P(Y)
Q(X)
Q(Y)
Pt*Q0
2000
2001
2002
2003
2004
2005
2006
10
14
19
28
40
44
56
5
7
6
7
8
9
11
30
32
38
43
47
53
60
60
60
840
600
55
930
600
52
1,260
600
50
1,680
600
50
1,860
600
45
2,340
600
Index:
base
(2000)
100
140
155
210
280
310
390
Table 3
Example of a weighted chain-linked Laspeyres index
Expenditure
Expenditure: in base period:
Pt-1*Qt-1
Time (t) P(X)
P(Y)
Q(X)
Q(Y)
Pt*Qt-1
2000
2001
2002
2003
2004
2005
2006
10
14
19
28
40
44
56
5
7
6
7
8
9
11
30
32
38
43
47
53
60
60
60
840
600
55
968
868
52
1,449
1,052
50
2,136
1,568
50
2,518
2,280
45
3,518
2,782
Index:
chainlinked
100
140
156
215
293
324
409
services (VICS), both produced by the ONS, and also the house price
index, produced by the Department for Communities and Local
Government (DCLG).
Paasche
The main difference between Laspeyres and Paasche indices is that,
with the Paasche, the weights are taken from the current period. The
formula for the Paasche is given below in equation 3:
=
t, 0
P .Q
P .Q
i
i,t
i,0
i, t
i, t
100
(3)
Table 4
Example of a weighted Paasche index
Current
Current
expenditure
expenditure: using base year
prices: P0*Qt
Time (t) P(X)
P(Y)
Q(X)
Q(Y)
Pt*Qt
2000
2001
2002
2003
2004
2005
2006
10
14
19
28
40
44
56
5
7
6
7
8
9
11
30
32
38
43
47
53
60
60
60
868
620
55
1,052
655
52
1,568
690
50
2,280
720
50
2,782
780
45
3,855
825
Index:
base
(2000)
100
140
161
227
317
357
467
Table 5
Example of a weighted chain-linked Paasche index
Current
Current
expenditure
expenditure: using base year
Time (t) P(X)
P(Y)
Q(X)
Q(Y)
Pt*Qt prices: Pt-1*Qt
2000
2001
2002
2003
2004
2005
2006
10
14
19
28
40
44
56
5
7
6
7
8
9
11
30
32
38
43
47
53
60
Index:
chainlinked
60
60
868
620
55
1,052
917
52
1,568
1,129
50
2,280
1,666
50
2,782
2,520
45
3,855
3,045
100
140
161
223
305
337
427
55
Methods explained
Table 7
Example of a weighted chain-linked Fisher index
Time (t)
Laspeyres
Paasche
Product
Fisher
The Fisher index, or the Fisher ideal index, is a form of compromise
between the Laspeyres and Paasche. Its formula is a geometric mean
of the Laspeyres and Paasche, as shown in equations 4 and 5. In
general, the Laspeyres is always greater than or equal to the Fisher,
and the Paasche is always less than or equal to the Fisher (6):
F
t, 0
P .Q P .Q
P .Q P .Q
i,t
i,0
i, t
i, t
)(
i,t
i,0
i, 0
i, t
100
(4)
(5)
(6)
10,000
19,600
25,076
47,969
89,429
109,032
174,555
100
140
158
219
299
330
418
The Fisher index is termed ideal because it gets around the practical
problem of time reversal. This is particularly relevant when the
data are seasonal and was encountered when attempts were made
to construct a quarterly Laspeyres version of QALI. Basically, what
happens is that when growth in the variable increases, but in a
subsequent period decreases, the index fails to decrease all the way
back and remains at a higher level. Superlative2 indices, such as
the Fisher, and also the Trnqvist, which is discussed in the next
section, overcome this problem and this is the reason why they are
sometimes preferred.
100
140
161
227
317
357
467
Trnqvist
The main feature of the Trnqvist index is that the weight used is
an average of the weight in the current and base period. Therefore,
like the Paasche, it tends to be used on historic data sets, as current
period information is needed to weight the series. Another difference
is that it is calculated geometrically rather than arithmetically. The
formula for a Trnqvist index is shown below in equations 7 and 8,
and examples of both unchained and chained Trnqvist indices are
shown below in Table 8 and Table 9 (the price and quantity data are
the same as those used previously, but are omitted to save space).
( )
Pi,t
I = P
i,0
i
T
t ,0
(w
+wi,0
)
2
i,t
(7)
where:
Pi,tQi,t
wi,t =
Time (t)
Laspeyres
Paasche
Product
56
100
140
161
223
305
337
427
(8)
P ,Q
Table 6
Example of a weighted Fisher index
100
140
155
210
280
310
390
100
140
156
215
293
324
409
2000
2001
2002
2003
2004
2005
2006
2000
2001
2002
2003
2004
2005
2006
Fisher:
square root
of product
10,000
19,600
24,895
47,722
88,667
110,567
182,236
Fisher:
square root
of product
100
140
158
218
298
333
427
it
i,t
It,0T = exp
(
i
)1n (P )]
wi,t+wi,0
2
Pi,t
i,0
(9)
Methods explained
Table 8
Example of a weighted Trnqvist index
Relative
Share
change
of Good
Time (t)
in P(X)
X
2000
2001
2002
2003
2004
2005
2006
1.0
1.4
1.9
2.8
4.0
4.4
5.6
0.50
0.52
0.69
0.77
0.82
0.84
0.87
Share of
X
averaged
Relative
over both
change
Share of
in P(Y)
Good Y
periods
X^share
0.50
0.51
0.59
0.63
0.66
0.67
0.69
1.00
1.19
1.46
1.92
2.50
2.69
3.26
1.00
1.40
1.20
1.40
1.60
1.80
2.20
0.50
0.48
0.31
0.23
0.18
0.16
0.13
Share of
Y
averaged
over both
(X^share)
periods
Y^share
*(Y^share)
0.50
0.49
0.41
0.37
0.34
0.33
0.31
1.00
1.18
1.08
1.13
1.17
1.21
1.28
Index:
base
(2000)
1.00
1.40
1.58
2.17
2.94
3.27
4.18
100
140
158
217
294
327
418
Share of
Y
averaged
over both
(X^share)
periods
Y^share
*(Y^share)
Index:
chainlinked
Table 9
Example of a weighted chain-linked Trnqvist index
Relative
Share
change
of Good
Time (t)
in P(X)
X
2000
2001
2002
2003
2004
2005
2006
1.00
1.40
1.36
1.47
1.43
1.10
1.27
0.50
0.52
0.69
0.77
0.82
0.84
0.87
Share of
X
averaged
Relative
over both
change
Share of
in P(Y)
Good Y
periods
X^share
0.50
0.51
0.60
0.73
0.80
0.83
0.85
1.00
1.19
1.20
1.33
1.33
1.08
1.23
(10)
and:
Y = output,
K = capital,
L = labour
and (1-) = income shares of K and L, respectively
In general, the income shares are assumed to be constant. However,
the use of Trnqvist indices means these are more flexible and can
change according to the returns to labour or capital.
Conclusion
1.00
1.40
0.86
1.17
1.14
1.13
1.22
0.50
0.48
0.31
0.23
0.18
0.16
0.13
0.25
0.49
0.40
0.27
0.20
0.17
0.15
1.00
1.18
0.94
1.04
1.03
1.02
1.03
1.00
1.40
1.13
1.38
1.37
1.10
1.27
100
140
158
219
299
330
417
Notes
1 Technically the RPI is not a true Laspeyres index, but it is a very
close approximation. For further detail and reasons consult the
Retail Price Index Technical Manual, available at www.statistics.
gov.uk/statbase/Product.asp?vlnk=2328
2 A superlative index is one that uses more information in its
construction than a base index, and is more flexible. The OECD
definition is as follows: Superlative indices are price or quantity
indices that are exact for a flexible aggregator. A flexible
aggregator is a second-order approximation to an arbitrary
production, cost, utility or distance function. Exactness implies
that a particular index number can be directly derived from a
specific flexible aggregator.
References
Caswell F (1995) Success in Statistics Third Edition, Coventry University
Harper M (1991) Statistics Sixth Edition (1991), Longman Group UK
Limited
Robjohns J (2006) Methodology Notes: Annual chain-linking
Economic Trends 630, pp 258 and at www.statistics.gov.uk/cci/article.
asp?ID=1554
57